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Vol. 4, Iss. 11
November 11, 2015

Appeals Court Holds That A Primary Insurer Need Not Initiate Settlement Efforts
In A Bad Case

 

The last issue of Coverage Opinions discussed SRM, Inc. v. Great American Insurance Co., No. 14-6160 (10th Cir. Aug. 25, 2015), where the court addressed whether primary and excess insurers have an affirmative duty to initiate settlement negotiations if an insured’s liability is clear and the claimant’s injuries are so severe that a judgment in excess of policy limits is likely. The answer was a split decision – the primary insurer has such a duty; the excess insurer does not.

That was the Tenth Circuit. The Fifth Circuit, in Hemphill v. State Farm Mutual Insurance Co., No. 15-60058 (5th Cir. Oct. 16, 2015), saw the primary insurer’s obligation differently.

The point here is not to address the facts at issue (low limit auto policy; clear liability on the insured; very serious damages) but to simply demonstrate that, within such a short period of time, two federal circuits reached opposite conclusions on the existence of this affirmative duty.

[Even if you do no auto coverage work, auto cases cannot be ignored when it comes to studying bad faith. They are the petri dish of bad faith for all liability policies.]

The Fifth Circuit in Hemphill held that a primary insurer did not have an affirmative duty to initiate settlement negotiations, even in a bad case: “Hemphill [insured] solely relies on a statement by the Mississippi Supreme Court in its 1983 Hartford opinion, which said that ‘there is authority for the proposition that in dangerous cases it is the duty of the insurance carrier to initiate settlement offers on its own,’ with citation to cases in other states. However, this statement is just dictum, and no Mississippi court since Hartford has discussed this dictum or cited to the non-binding cases that the court in Hartford cited. Subsequent applications of Hartford by the Mississippi Supreme Court in a duty-to-settle context have either imposed a duty to settle when the claimant made a settlement offer, or found ‘no evidence that the [i]nsurers breached any duty in failing to settle th[e] claim at an earlier time’ when the claimant did not initially make a settlement offer and the insurer sufficiently evaluated the claim. None of the Mississippi cases that have applied Hartford have found an insurer has a duty to make a settlement offer when the claimant has not made a settlement offer. Indeed, over the thirty-three years since Hartford, no case from either the Mississippi Supreme Court or a Mississippi intermediate appellate court has suggested or even hinted that the Mississippi Supreme Court would hold that an insurer has a duty to make a settlement offer absent a settlement offer by the claimant. Therefore, this Court makes an Erie guess that the Mississippi Supreme Court would not impose such a duty under the circumstances presented herein.” (citations omitted).

 

 
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